SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONSBY FEDERAL RESERVE DISTRICT

OCTOBER 1991

TABLE OF CONTENTS

SUMMARY ................................................................. . i

First District - Boston ........................................................ I-1

Second District - New York .............. ...................................... II-1

Third District - Philadelphia .............................................. . II-1

Fourth District - Cleveland ............................................... IV-1

Fifth District - Richmond ......................................... .......... V-1

Sixth District - Atlanta ................................................... VI-1

Seventh District - Chicago ................................................ . VII-

Eighth District - St. Louis ................................................... . VIII-

Ninth District - M inneapolis ................................................. IX-1

Tenth District - Kansas City ................................................... X-

Eleventh District - Dallas ..................................................... X I-1

Twelfth District - San Francisco .................................................. XII-1

SUMMARY*

Sources contacted by the Federal Reserve banks generally

described the economy in September and early October as weak or

growing slowly. In most districts there has been little

improvement in retail sales, and a few reported some slowing. Auto

sales have generally been weak. Expected crop yields vary, but

agricultural prices remain low. Manufacturing output is still

improving although at a slower pace in some areas. Several

districts reported some increase in home sales, but residential

construction is still at low levels. Loan demand has been weak for

commercial, industrial, and consumer loans. Some districts noted

a pickup in real estate loans, especially refinancings.

CONSUMER SPENDING

Retail sales were reported to be slow or sluggish in most

districts. Dallas and San Francisco cited weakness in the retail

sector, and in Boston and Philadelphia sales have been flat to

slightly below last year's levels. In Atlanta they have been flat

to slightly above year-ago levels but have improved little since

*Prepared at the Federal Reserve Bank of Philadelphia and based oninformation collected before October 11, 1991. This documentsummarizes comments received from businesses and other contactsoutside the Federal Reserve and is not a commentary on the views ofFederal Reserve officials.

ii

August. Cleveland and Richmond reported that sales have slowed in

the last month. Two districts indicated improvement in retail

sales. Kansas City reported sales increased somewhat, and

Minneapolis reported "fairly strong" sales.

New York, Philadelphia, and Dallas indicated that retail

inventories were under control, but some contacts in Cleveland and

most in Kansas City considered inventories too high.

In general the outlook for the holiday sales season is

cautious. In Kansas City, however, some retailers are expecting

relatively strong sales for the holiday season, and in Richmond

they are optimistic about their business over the next six months.

Auto sales were reported to be flat or down from last year in

many districts although the Cleveland District indicated that sales

rose in late September and early October, and Minneapolis noted a

recent surge in truck sales. Several contacts in the Cleveland

District said dealers' orders for new models are slightly above

year-ago levels; but Atlanta indicated that orders have been mixed

and dealers there do not expect an acceleration of demand. Dealers

in the Philadelphia District are also pessimistic about prospects

for the 1992 model year.

MANUFACTURING

In most districts output and shipments in the industrial

sector have been stable to slightly higher. Philadelphia noted that

the pace of advance had slowed recently. There was also some

indication of slower growth in the immediate Chicago area. San

iii

Francisco mentioned that conditions were still worsening in

California and in the Pacific Northwest while the industrial sector

in Idaho and Utah remained stable. Cleveland and Chicago reported

that autos and steel have been most responsible for the recent

increases in manufacturing. Boston and St. Louis noted weakness in

the defense industry.

Boston and Cleveland mentioned that manufacturing inventories

are at satisfactory levels while Kansas City noted that firms are

still trying to trim inventories.

Reports about new orders were mixed. Richmond noted an

increase in new orders, and some manufacturers in the New York

District have seen an improvement, but new orders were weak or

declining in Boston and Philadelphia. Orders for defense goods in

St. Louis and for oil field machinery in Dallas were reported to be

down.

Philadelphia and Richmond said that, on balance, manufacturers

expect improvement over the next six months. Boston, however,

noted concern about renewed softness.

REAL ESTATE AND CONSTRUCTION

Reports on housing were also mixed. New York, St. Louis, and

Kansas City reported some increase in home sales, and Atlanta and

Minneapolis reported mixed conditions with increases in some parts

of their districts and declines in other parts. Richmond said that

housing markets in the district are sluggish. Likewise, San

Francisco reported that home sales in California and the Pacific

iv

Northwest, which had rebounded earlier in the year, were now

sluggish. New home construction is still slow in those districts

that mentioned it.

In the commercial leasing market, the New York District said

rents were still falling, and San Francisco reported plummeting

commercial rental rates in the Los Angeles market.

AGRICULTURE AND NATURAL RESOURCES

In the agricultural sector, expected yields compared to last

year vary by crop, but prices generally remain low. Drier than

normal weather has reduced yields for corn according to several

district reports. The Chicago District added that corn yields,

although lower than last year, are turning out to be much better

than earlier estimates. In the Dallas District and in parts of the

Minneapolis District, excessive precipitation hurt crop production

although yields are still good. In North Dakota, corn and dry bean

yields are sharply higher than last year; in the Richmond District

they are slightly lower. The wheat crop forecast for Montana is

the highest in many years. Prices for many crops, livestock, and

dairy products are weak. San Francisco reported that high

production of fruits and vegetables in California's Central Valley

has lowered prices for those products.

Low natural gas prices have reduced drilling activity in the

Kansas City and Dallas districts. Dallas also reported that some

energy firms have announced layoffs.

FINANCE

In general, loan demand has been weak. Overall demand has

decreased in the New York District, and total loan volume continued

to decline in Philadelphia. In Kansas City demand for commercial

and industrial loans is down, and demand remains soft in Chicago.

New York and San Francisco specifically mentioned that consumer

loan demand was sluggish. Atlanta, on the other hand, reported

moderate improvement in loan demand in September. And in the last

two months, total loans outstanding have increased in the St. Louis

District. A number of districts have experienced increased demand

for mortgage loans, especially refinancings spurred by lower

interest rates.

Several districts reported that the majority of banks have not

raised credit standards in the past few months. Cleveland noted

that some banks appear to be less aggressive in seeking loans.

FIRST DISTRICT-BOSTON

First District economic activity continued subdued in September

and early October. Most retailers contacted report that sales remain

weak, although a few experienced a pickup in recent weeks. Retail

respondents do not expect sales to improve or deteriorate further in the

remainder of the year. Among First District manufacturing contacts, a

majority express concern that business conditions are showing no clear

uptrend. While half of the respondents experienced a slight improvement

in demand during the summer, several sense renewed softness more

recently, and most expect no significant growth until 1992.

Retail

September sales were flat to down from September 1990 for most of

the First District merchants contacted in mid-October. A few, however,

have seen sales increases - one as high as 10 percent - in recent weeks.

Sales improvements have been concentrated among heavily promoted items,

as consumers become increasingly price- and value-conscious. Despite

slow sales, inventories are generally low.

Retailers report very modest (or zero) increases in their prices

in recent months, partly because of heavy promotional activity and

partly because vendors are not raising prices. Respondents are

maintaining margins and profits by cutting costs. Several contacts

indicate that employee hours have been cut, but none plan layoffs, and

seasonal hiring is scheduled as usual.

Contacts say they are approaching the Christmas season cautiously.

Those with stores concentrated in New England are less optimistic than

nationwide chains. Some believe that the "worst is behind us," but most

look forward to little change in their sales results for the remainder

of the year.

Auto Sales

Reports on automobile sales are mixed. Dealers note that foreign

car sales have been performing relatively well, while domestic car sales

have only inched up since last month. Sales of less expensive and used

cars are generally stronger than those of new cars. Tight credit is

said to be a major factor behind the weak performance. However, dealers

hope that the worst is over, partly because the average age of cars is

rising.

Manufacturing

At a majority of the First District manufacturers contacted, sales

are either flat or up very slightly compared with year-ago levels, but

incoming orders are flat to down. As a result, backlogs are declining

at some firms. Although half of these companies report that August or

the third quarter showed some improvement over the previous period,

several express disappointment about recent inquiries and concern about

renewed softness. Much of the summer pickup was attributed to improved

demand from the commercial aircraft, auto, and health care industries.

By contrast, defense, commercial real estate, and less specialized

industrial products were seen as remaining relatively weak. Moreover,

the decline in August and September auto sales has reportedly raised

doubts that sales to the auto industry will continue at the summer's

pace. As for foreign markets, the United Kingdom is described as

surprisingly weak, and Europe and Japan are characterized as better but

slowing.

Several contacts, but especially those serving the auto industry,

report that they are facing pressure to cut prices. Respondents have

frequently been able to force their own suppliers to reduce prices as

well. However, cost-cutting programs or productivity increases have

permitted some firms to maintain or improve profit margins despite these

competitive pressures. All of these contacts are watching inventories

closely and deem their current levels satisfactory.

Most First District manufacturing contacts continue to reduce

their employment levels, either through attrition or through ongoing

layoffs. In several cases, projected job cuts are substantial. Capital

spending remains largely on budget. One firm has cut expenditures well

below plan, but another has revised a previously reduced target upward.

In 1992, capital spending is expected to remain close to current levels.

First District manufacturing contacts generally expect the

recovery to be very slow, with little visible improvement before early

to mid-1992. A majority see no clear uptrend or are concerned about

"backsliding" in the third or fourth quarter.

II-1

SECOND DISTRICT--NEW YORK

Developments in the District economy have remained mixed in recent

weeks. September sales at District department stores were generally

sluggish and homebuilders continue to report only subdued interest in

new homes. Office leasing activity has been rather slow and vacancy

rates remain high in many areas. On the other hand, September

unemployment rates fell in New Jersey and New York following a rise in

August while the survey of Buffalo purchasing managers showed a doubling

of firms with increased new orders. Most senior loan officers surveyed

at small and midsized banks reported their willingness to lend is

unchanged from three months earlier.

Consumer Spending

September sales at District department stores were generally

sluggish and, for the most part, below plan. One chain that did meet

its target attributed that success to heavy promotional activity and a

boost from Canadian shoppers in upstate New York. Over-the-year changes

at District stores ranged from -5 percent to +2 percent during

September. Some firms cited strength in sales of furniture and home

furnishings with weakness in apparel while others noted the opposite

pattern. Despite slower-than-targeted sales at many stores, inventories

were reported to be in good shape due primarily to careful monitoring

and some extra promotionals.

Showing optimism about the longer run outlook for consumer spending

in the District, a leading French retailer just opened a large

department store in midtown Manhattan and several national chains began

operations in a rebuilt shopping mall in New Jersey. In Westchester

II-2

County a leading developer is expanding a shopping mall and in the

Buffalo area, two retail chains which are new to the region recently

opened stores as part of an expansion of a two-year old mall.

Residential Construction and Real Estate

District homebuilders continue to report only subdued interest in

new homes and now expect 1991 housing starts in many areas to total less

than the low levels of 1990. Several respondents commented on consumer

reluctance to purchase new homes in the face of widespread layoffs and

corporate restructurings. In addition, while the resale market shows

some improvement as the result of lower prices and falling mortgage

rates, the inventory of existing homes remains high in several parts of

the District, further weakening the demand for new homes. In much of the

District homebuilding activity is also reportedly impeded by a shortage

of credit for acquisition and construction loans.

Office leasing activity has been rather sluggish in recent weeks

and vacancy rates remain high in many parts of the District. Asking

rental rates continue to decline due to the abundance of space and

various other concessions are also being offered to attract new tenants.

Despite the recent slow pace of leasing activity, the primary office

vacancy rate in midtown Manhattan edged lower as virtually no new space

was added. The vacancy rate in downtown Manhattan rose, however.

Other Business Activity

In September, District unemployment rates continued their seesaw

pattern of the last several months. The seasonally adjusted

unemployment rate fell 0.7 percentage point in New York and 0.5

percentage point in New Jersey after rising 0.4 percentage point in both

states during August. New York's rate is now 6.8 percent and New

Jersey's 6.2 percent. Nonfarm employment remains below year-earlier

II-3

levels, and in recent weeks American Express, Union Carbide and Allied-

Signal announced plans to lay off several thousand employees, at least

some of whom will be in the Second District. Meanwhile economic

development officials from New York State and City, New Jersey, and

Connecticut signed an agreement to work together towards keeping firms

in the region and attracting new ones.

The September survey of Buffalo purchasing managers showed a

doubling of firms with increased new orders to 42 percent as well as a

substantial drop in those with a decreased orders. The August survey of

purchasing managers in Rochester showed a rise in the percentage of

firms anticipating a deterioration of business conditions over the next

three months, though by far the majority continue to expect the same or

improved conditions.

Financial Developments

Most midsized banks in the Second District reported that their

willingness to lend remains unchanged from three months ago. These

officers also reported a decrease in the overall demand for loans,

especially for consumer loans. Demand appears somewhat stronger for

real estate loans, where roughly equal numbers reported increased and

lessened demand. Of the senior officers reporting a change in loan

delinquencies from three months ago, most reported a rise in the

delinquency rate for total loans, and for consumer loans in particular.

Nearly all surveyed banks are now charging lower loan rates than

they were three months ago. Three fourths reported unchanged credit

standards, with the remaining quarter having tightened somewhat.

Tightening measures included lower loan-to-value ratios, more stringent

collateral requirements, and more comprehensive analyses of applicants'

credit histories.

III-1

THIRD DISTRICT - PHILADELPHIA

Reports from the Third District business community in early October suggest that

overall economic activity has been slower recently than it was in late summer. Manufacturers

indicated that business was still moving up, but at a slower pace than in previous months.

Retailers reported that sales remained sluggish, and auto dealers said sales were very slow.

Bankers noted a continuing decline in business lending and some said that consumer lending,

which had been steady through the summer, turned down in September.

The outlook is mixed. Manufacturers continue to express a high level of optimism,

while the view ahead is dim in other sectors. Retailers do not expect to post real gains in sales

for this year's fourth quarter compared to last year's. Auto dealers are pessimistic for the new

model year. Bankers anticipate a continuing downward trend in financing activity for both

businesses and households. Many business contacts cite low confidence as a deterrent to

expanded spending by firms and consumers, and they say the factors required to restore

confidence are less restrictive conditions for business credit and a healthier employment

situation.

MANUFACTURING

A majority of Third District manufacturers contacted in early October reported that

business was running at a steady pace. Based on these reports, it appeared that shipments from

area plants were increasing slightly, on balance, while new orders were declining marginally.

Approximately half of the manufacturers surveyed said they were cutting inventories and one-

third indicated they were maintaining them at stable levels. Employment appeared to be

somewhat weaker than in recent months; although approximately two-thirds of the industrial

firms contacted were holding to steady employment and working hours, nearly one-fourth were

cutting payrolls.

Although recent indications are that the upward trend in the region's goods-producing

III-2

sector was slackening, most of the manufacturers polled for this report were optimistic that

further improvement is likely. Three-fourths expect increases in orders during the next six

months and two-thirds anticipate stepping up shipments. Despite these forecasted gains in

output, employment plans at plants in the Third District call for no change in the work forces,

on balance, although a small increase in hours is possible. Capital spending could get a boost

as one-third of the firms surveyed indicated they will increase expenditures for plant and

equipment over the next six months while half will hold to steady rates of spending.

RETAIL

Third District retailers generally indicated that sales in September were just even with

or slightly below the level of last September, in current dollars. The year-over-year comparison

appeared to be relatively better for discount stores than for department and specialty stores--

except for toy stores, where there were some reports of good sales growth. Most store executives

said they were satisfied that their inventories were in line with current and expected sales.

Third District merchants contacted for this report generally did not expect any

improvement in the pace of sales in October, and they were nearly unanimous in giving very

subdued forecasts for the Christmas shopping season. The consensus of expectations is that the

best that can be hoped for is flat or very slightly better sales, in dollar terms, this year

compared to last. Some retailers suggested that solid improvement will not take hold until next

spring at the earliest. They describe the consumer as reluctant to step up spending while the

economic outlook remains uncertain.

Most auto dealers reported that unit sales in September were well down from a year ago,

and many said sales were the lowest in many years for the month of September. Even dealers

who managed to achieve steady unit sales said dollar sales were insufficient to maintain profit

margins. In general, dealers' forecasts for the 1992 model year are very pessimistic.

FINANCE

Third District bankers reported that total loan volume outstanding continued to decline

in September and early October, with declines in business and consumer credit and near

stability in real estate based loans. Commercial and industrial lending continued to fall off,

III-3

according to bankers, as a result of low loan demand and banks' conservative approach to new

business lending. Consumer loan volume outstanding has varied week-to-week recently, but

most of the bankers contacted for this report said the trend has been down. Several bank

executives said they believe consumers are making efforts to pay down debt, especially on

credit cards. In contrast, revolving home equity credit volume has been stable and outstandings

for other real estate lending have been virtually steady.

Bankers generally believe the current downward trend in lending will continue until

confidence is restored among businesses and consumers. Some bank loan officers noted

weakening financial condition in the small business sector that portends a decline in financing

activity at these types of firms. Nonetheless, a stabilization or turnaround is possible for

business lending in general, according to some bankers, if interest rates fall further. These

bankers said that lower rates could encourage some of their potential borrowers to implement

investment plans. A turnaround in consumer loan demand is dependent on an improved

employment situation and a return of consumer confidence, in the view of most Third District

bankers.

IV-1

FOURTH DISTRICT - CLEVELAND

Summary. Economic activity in the Fourth District continues to recover,

albeit slowly, and business sources generally expect further improvement over

the near term. Consumer spending has shown little sign of sustained

strengthening, and retailers remain cautious about their order and inventory

plans for the balance of the year. The revival in manufacturing continues to

lead activity in the District, with the automotive and steel industries

expecting their output this quarter to be the best of the year.

Manufacturers' inventories are judged to be close to desired levels. Loan

activity, except for mortgage refinancing, remains soft, and small businesses

report credit is available.

The Region. Recovery in the Fourth District continues slowly. Total

employment in Ohio rose in September for the fifth of the last seven months.

A further but slow expansion in employment is suggested in the latest Ohio

composite index of leading indicators, which rose for the sixth consecutive

month in July.

In a recent survey of small businesses by a commercial bank in the

District, nearly half of the 600 respondents expect business to improve

further over the next three months, and a roughly similar proportion

expect no change. Only 8 percent expect a worsening. Manufacturers are the

most optimistic about the short-term outlook, while fewer then one-half of

retail, finance and service respondents expect better conditions.

IV-2

Consumer Spending. There is little indication of a step-up in retail

sales, although several retailers believe that their sales have been better in

the District than in some other regions. September sales fell from preceding

months, resulting in some unwanted inventories, according to a few retailers.

Some others believe that they were able to clear stocks of summer merchandise,

and that their inventories are at about desired levels. Several complain

about excess retail capacity, and do not expect much improvement in retail

sales until employment and income improve. Consequently, they are cautious in

purchase and inventory plans for the upcoming holiday season.

Auto dealers contacted appear to be a little more optimistic about

near-term sales prospects than they were late this summer. Several report

that orders for new model cars have been slightly above a year ago. A

late-September, early-October rise in new car sales, apparently aided by

widespread and generous price incentives, encouraged dealers who were

concerned earlier that consumers might resist the latest price hikes.

Manufacturing. Most manufacturers report a continuation of the recovery

in output that began last spring. Auto producers are reported to be planning

a higher rate of car production this quarter than last, although schedules of

some producers have recently been trimmed because of fewer-than-expected

dealer orders. Still, production plans include some inventory rebuilding in

view of the lower than usual levels of car inventories for this time of year,

but output will be closely geared to dealer orders, according to auto sources.

Steel mill operations in the District have been boosted in recent weeks

to the best levels of the year because of the higher auto and appliance orders

and some rebuilding of depleted steel inventories. Although the operating

rate in the steel industry has climbed to a recent 77 percent of capacity

IV-3

nationally, some mills in the District are reporting operating rates in the

mid-80s. A nearly-full order book for flat-rolled steel products has

lengthened deliveries to late 1991 and early 1992. Steel warehouse centers

have also stepped up orders, possibly because of the recently announced price

increases that are expected to be sustained, following a declining trend in

steel prices in recent years.

Recovery in the tire industry has been mixed and less-than-expected,

especially for original equipment tires. The weak market leads some producers

to believe that the September tire price increases will not last very long.

Generally, capital goods producers believe that the trough in their

industries probably occurred in the spring, although revival has been slow.

Machine tool builders complain that orders continue to drift downward,

although at a reduced pace from earlier in the year. A supplier of industrial

equipment to the machinery industries reports that orders bottomed last May,

but have not improved enough to materially change operations. Orders for

industrial controls also reached a trough in the spring quarter, and sales

rebounded last quarter and are expected to rise even more this quarter,

according to a large producer. Another capital goods manufacturer reports a

slow revival in orders from a 1991:IQ recession low for both machinery and

industrial consumable products. Finally, heavy-duty truck orders continue on

a jagged, upward trend since early this year, according to a major supplier to

this industry.

Manufacturers' inventories are generally believed to be close to desired

levels. Except for some spotty rebuilding in steel and tire inventories,

however, most respondents do not anticipate much of a buildup of inventories

in the near term.

IV-4

Financial Developments. There is still little sign of a pickup in

business or consumer instalment loans, although further recent declines in

mortgage rates have induced a revival in mortgage loan refinancing. In

general, thrifts report that loan commitments outstanding during the late

summer declined from earlier in the summer, and that loans for speculative

building of single-family and multiple-family units are virtually

non-existent. Depositories have continued to cut interest rates on deposits.

Banks generally report no pickup in commercial and industrial loans, but

instalment loans have spurted for those banks that have offered rates

competitive with auto finance companies. Some banks report they are still not

soliciting new commercial construction loans, although inquiries have also

"dried up" this summer, according to a lender that specializes in small

commercial developments.

A number of small businesses in the District state that credit is

available. Lending standards have not tightened in recent months, although

some report that banks appear to be less aggressive in seeking loans. They

also believe that there is an adequate number of lenders available to small

businesses in their regions. Auto dealers report that floor plan financing

for 1992 models has not been more difficult to obtain, although some report

that banks are looking more closely at their financial condition than in the

past.

FIFTH DISTRICT-RICHMOND

Overview

District economic activity was generally weak in late September and

early October. Financial institutions reported that the demand for commercial

and consumer loans was lackluster. The residential real estate market

remained sluggish, though lower interest rates were said to have spurred

activity in some areas. Retail activity slowed further, and dry weather

reduced prospects for crop yields somewhat. Manufacturing remained steady,

and exports increased at District ports.

Consumer Spending

Our regular survey indicated that retail activity continued to slow in

September. Shopper traffic and sales, including sales of big ticket items,

apparently fell, as did employment and capital expenditures. Retailers

reported increases in wages and in wholesale and retail prices.

Respondents were optimistic about the six-month outlook for the economy

in general and for their own businesses. They anticipated increases in

shopper traffic and sales. Most foresaw little change in employment but

expected wages, wholesale prices and retail prices to rise.

Manufacturing

Responses to our regular survey of manufacturers indicated that District

factory activity was stable in September. Manufacturers reported almost no

change in most indicators, although shipments, new orders and prices of raw

materials increased. Besides poor sales, manufacturers cited excess capacity

as their single most important problem.

Manufacturers remained optimistic about general business conditions and

about their own prospects over the next six months. Half the manufacturers

V-2

foresaw increases in shipments and new orders, and few expected decreases.

Respondents also anticipated increases in order backlogs, employee hours,

exports and prices, but they expected little change in inventories, employment

or capital expenditures.

Port Activity

Representatives at District ports--Baltimore, Charleston, and Hampton

Roads (Norfolk)--indicated that exports were higher in September than in

August and that imports remained about the same. Compared with a year

earlier, exports were higher and imports were lower. Exports were expected to

increase faster than imports during the next six months.

Housing

Real estate analysts and lenders surveyed by telephone indicated that

the residential market remained sluggish in much of the District. Respondents

blamed slow sales on potential homebuyers' insecurity about their jobs and

income levels. Several, though, suggested that lower interest rates were

beginning to spur activity in their areas. Despite large inventories of homes

for sale, several noted that prices were steady.

Finance

District financial institutions contacted by telephone reported that

credit availability and credit standards were unchanged over the last six

weeks. Banks reported that demand for consumer and commercial loans remained

weak and that commercial demand had softened further. Most banks contacted

had lowered loan rates over the last six weeks; as a result, demand increased

for the refinancing of home mortgages, as in the previous survey. All of the

surveyed banks had reduced their prime lending rates in recent weeks.

V-3

Agriculture

According to District agricultural analysts, a drier-than-normal

September had reduced yield prospects for some District crops but had not

curtailed fall planting activity. Slightly lower yields were projected for

corn, soybeans, peanuts and some types of tobacco, and pastures were said to

be in generally poor condition. The apple crop in West Virginia was termed

poor, although in the Carolinas, the weather apparently did not affect the

apple crop or reduce cotton yields.

Dry weather had not yet affected the planting of winter wheat or other

small grains underway across much of the District. Planting progress was

reported to be somewhat better than normal, but analysts said more rain was

needed soon to keep planting activity on schedule.

VI-1

SIXTH DISTRICT - ATLANTA

Overview: Signals of the economy's condition remained mixed during September

according to reports from the District. Consumers remained largely on the sidelines. Retailers

are reporting little good news and generally express pessimism about holiday sales prospects.

Factory activity was described as mixed, with moderate strength in selected apparel and export

industries and continued weakness in durable goods and construction-related products. Despite

declining mortgage rates, home sales were lackluster as summer drew to a close. Consequently,

new construction activity has not rebounded. Bankers report some improvement in loan demand,

but borrowers continue to feel constrained by strict credit standards. Weak demand and

employment uncertainty are said to be restraining product prices and wage pressures.

Consumer Spending: September consumer activity showed little improvement over

August according to our contacts. Retail sales were flat to slightly above year-ago levels. Most

respondents were clearly disappointed with back-to-school sales. Discount chains continued to

post modest gains as consumers substituted away from higher-priced stores. Retailers remain

pessimistic about holiday sales, expecting only to meet last year's relatively weak performance.

Reflecting their lackluster expectations, advertising expenditures continue soft.

Durables consumption has shown no improvement in the District. Automobile dealers

again reported flat sales relative to year-ago levels. Orders for 1992 models are mixed,

dependent upon individual dealer inventories. However, dealers say they are not anticipating an

acceleration in consumer demand and so are not expanding inventories. Floor traffic has been

sparse.

Tourism improved moderately during September compared with year-ago levels.

Contacts in Atlanta, New Orleans, and Orlando reported increases in convention bookings and

visitors.

VI-2

Manufacturing: Factory activity was again said to be mixed, with improvement noted

in export goods and some textiles. In general, inventories are lean; some rebuilding is

anticipated in the fourth quarter. Plans for capital expansion are also mixed.

The demand for fabric textiles has improved over the past two months, particularly for

denim products. A sportswear manufacturer expects double-digit increases in shipments

compared with year-ago levels. A producer of plastic containers reported that sales and

production have been above expectations. Consequently, the firm is accelerating capital

expenditures. Paper and pulp exports continue to expand.

Manufacturers dependent upon construction activity report no improvement. Carpet

sales and production are at year-ago levels. A furniture manufacturer reported that orders

continue to weaken.

A residential heating and cooling systems manufacturer, producing primarily for the

replacement market, reports that sales have been declining since January. He foresees no

recovery in his business and has pared inventories aggressively. Reflecting spotty improvement

in production, regional shipping firms report modest increases in activity during September.

Despite some recent stability in natural gas prices, a supplier of offshore rig equipment

reported that activity in the Gulf of Mexico is declining as major oil and gas producers move

operations overseas.

Financial Services: Most regional banking contacts saw moderate improvement in loan

demand during September. Bankers report that they have not changed credit standards in the last

few months. Auto dealers, retailers, construction firms, and small businesses in general describe

lending standards as tight. Larger firms continue to seek funding from other sources, such as

commercial paper or private placements. As a result of slow loan growth, several banks report

ample liquidity.

VI-3

Construction: Home sales in the Southeast were mixed in September. Some recovery

was observed in the western part of the District, but realtor contacts in Georgia and Florida

reported September sales slowing more than seasonally from a stronger summer. Several

contacts noted that new home sales were doing relatively better than resales because of financial

incentives offered by builders.

The improvement in home sales is reported for the low end of the price scale, despite

more restrictive mortgage standards. The middle-to-upper price ranges remain sluggish. Falling

interest rates have not generally initiated a rebound in sales, but have led to some increase in

customer traffic and a considerable increase in refinancing.

Home inventories, while declining, are still said to be excessive for current sales

levels. Consequently, new construction activity has been mixed. A Florida utility company

reported that actual construction activity has remained flat despite a recent acceleration in

building permits. Building materials suppliers continue to struggle, keeping inventories at

minimal levels.

Commercial construction continues to be depressed and most contacts expect that it will

remain so for some time. Financing is still said to be difficult to obtain, even for projects that

are significantly pre-leased.

Wages and Prices: Most contacts reported no change in direct wage pressures,

although increases in health insurance and worker's compensation costs continue to push total

compensation higher. Wage pressures are said to be especially weak in the services sector.

Reports on wholesale product prices describe them as relatively stable because of aggressive

competition and soft input prices.

VII-1

SEVENTH DISTRICT--CHICAGO

Summary. Underlying trends in the District economy have changed little over the past month,

according to most contacts, although continued sluggishness in consumer demand has led to some

slowing in the pace of recovery in industrial activity. Manufacturers generally continued to provide an

important contribution to District growth, but several contacts stated that auto production gains could

slow in the fourth quarter if car sales growth does not improve. District commercial and industrial loan

demand remained soft, in part due to moderate requirements for inventory financing. The agricultural

harvest is proceeding rapidly, and harvest estimates have been raised recently.

Consumer Spending. District contacts indicate that consumer spending gains remained sluggish

in September and early October, with dollar sales depressed by intense price competition. A large general

merchandise chain reported continued flat sales and stated that there was little sign of a recovery in

consumer spending. A retailers' association in Indiana stated that its membership's sales growth generally

remains flat, while losses from bad checks have not improved significantly. A retailing analyst reported

that consumer caution has slowed spending growth in Iowa to the rate seen nationally, despite relatively

high levels of consumer resources. Citing longer car holding periods, a retailers' association in Michigan

stated that vehicle service stores were doing relatively well. After consistent year-over-year declines in

sales over the summer months, a large department store chain reported that sales in early October were

running slightly ahead of last year; but the year-ago comparison was against the period when sales began

to be impacted by the recession. Sales for the rest of the year are expected to be flat with a year ago,

according to this contact. A market research firm reported that Christmas purchasing plans dropped from

August to September, reaching a level below the weak year-earlier period.

Autos. Disappointing new car sales growth could temper the production gains being experienced

in the District's auto industry. Several industry analysts noted that September sales rates benefitted from

strong fleet sales, and fleet sales are expected to run through November. An industry economist reported

that car demand from individuals had improved somewhat early in the summer, but slipped a little in

recent months. Current car and light truck production plans for the fourth quarter imply a small gain from

VII-2

the third quarter on a seasonally adjusted basis, and a small decline in the first quarter of 1992, according

to one economist. An auto parts supplier remained apprehensive about the first half of 1992 in the

absence of an increase in car sales rates, although several analysts anticipated increasingly aggressive

incentive programs in coming months. A finance subsidiary of a large automaker reported continued

growth in lending, citing a pullback from banks in financing consumer purchases and dealers' inventory.

Delinquency rates have caused some "severe heartburn" for many lenders, according to this contact,

leading to higher down payments and generally stricter scrutiny of the marginal borrower. However, one

industry economist reported that the overall loan turndown rate generally has declined since the first

quarter. Because dealer inventory commitments remain very cautious, financing inventory hasn't been a

difficult problem for most dealers, according to this contact.

Manufacturing. Manufacturing activity generally continued to boost the overall District

economy in recent weeks. The most recent purchasing managers' surveys for Chicago, Detroit, Western

Michigan, Milwaukee and Indianapolis each showed a majority of respondents indicating expansion in

orders and production, although some slowing in the pace was indicated in the Chicago survey. A large

steel producer reported that the auto industry continued to provide the major source of strength in

demand. Steel industry production is expected to continue to expand from the third to fourth quarter (on a

seasonally adjusted basis) under conservative assumptions about shipments to the auto industry,

according to this contact. A large manufacturer of a wide variety of specialty supplies reported that sales

in most product lines remain flat, and that sales of a product that has historically been a leading indicator

has yet to show an upturn. A supplier to District manufacturers of metal furniture stated that sales by

these firms appeared to have passed their trough, after a difficult period. Sales of construction machinery

in the District began to slump again in early August, according to an industry analyst, after a slow

recovery earlier in the year. Year-to-date construction machinery sales in the District are still below last

year's levels, but the decline has not been so severe as in the nation as a whole. A large shipper stated that

overseas shipments of agricultural and construction machinery continued to expand over the summer

months.

VII-3

Banking. Most banks reported that commercial and industrial loan demand remained soft in

recent weeks, with several indicating that most customers remain unwilling to commit to inventories.

One middle-market lender reported that loan demand is generally slow, and stated that customer optimism

has been waning since a recovery in the summer. Capital spending project cancellations have begun to

arise, according to this contact, joining the continuing reports of postponements. A middle-market lender

to businesses located throughout the Midwest could not identify a commercial or industrial sector where

customers had seen a significant upturn in activity. This banker stated that most customers linked to the

auto industry continued to expect some small improvement in sales over the rest of the year, but these

expectations had weakened over the past 60 days. Several banks reported that commercial and industrial

loan demand in Michigan remained soft, and one contact expressed concern about the state's prospects in

the absence of a solid recovery in auto sales. However, one banker reported that several banks in the state

were "fully loaned" and were eager to sell participations. A recent survey indicated that firms in the

Great Lakes and Pacific regions report the least difficulty in obtaining credit among firms surveyed

nationwide, and the survey's directors stated that the survey results show that credit has been easier to

obtain during the recent recession than in prior recessions. Residential mortgage loan demand in the

District remained a bright spot, according to one contact, as mortgage rates continued to decline around

the District.

Agriculture. The District harvest is progressing rapidly. The corn and soybean harvest ranges

from 25 percent complete in Michigan and Wisconsin to 75 percent in Illinois. Except for Iowa, the

harvesting progress is double the normal completion rate for early October. Yields are proving much

better than expected in many areas, despite a premature killing frost in September. The corn and soybean

production estimates for District states were revised upward by 4 and 6 percent, respectively, in the

USDA projections released on October 10. The soybean harvest is now expected to match that of a year

ago, both in District states and nationwide. Corn production is expected to be down 10 percent in District

states and down 6 percent nationwide.

VIII-1

EIGHTH DISTRICT - ST. LOUIS

Summary

The District economy continues to show signs of a gradual

recovery. Manufacturing employment, except in defense-related

industries, is strengthening somewhat and contacts expect further

improvement before year-end. Manufacturing activity is mixed. Consumer

spending remains depressed. Lower interest rates have stimulated new and

existing home sales, although sources do not expect a rebound in

residential construction until next year. The fall harvest continues to

progress, but yields on some crops have been hurt by adverse weather.

Employment

Although respondents in many areas of the District expect some

improvement before year-end, employment growth continues to be

characterized by contacts as flat or weak. A number of District

employers, especially those in defense-related industries, have announced

small- and medium-sized layoffs in recent months. In contrast, a major

home appliance manufacturer has been able to keep employment levels

stable because declines in shipments and orders in recent months were

correctly anticipated. A large apparel manufacturer, which reduced

employment significantly this year, plans to rehire some or all of these

workers in the near future. In addition, respondents in Arkansas and

northern Mississippi believe their regions are rebounding, as evidenced

by rising demand for manufacturing workers. A survey of Memphis

companies revealed that more plan to add workers in the fourth quarter

than they did in the third, holiday staffing excluded.

VIII-2

Manufacturing

Overall manufacturing activity remains weak, with durable goods

manufacturers somewhat more upbeat about the future than producers of

nondurable goods. Auto parts manufacturers in Arkansas have expanded

production and hired more workers because of increased activity in the

auto sector. A District home appliance manufacturer reports industry

shipments have been flat on a seasonally adjusted annual basis, despite

the significant downturn in housing construction. Manufacturers of

defense-related products, however, report significant declines in new

orders. Most contacts expect no upturn in capital spending in the near

future. An Arkansas apparel maker reports higher sales, but also lower

margins because of higher wage and input costs. He says that retailers

have been reluctant to pass on these higher costs to consumers. In the

food processing sector, most manufacturers report that the recession has

not hurt business significantly.

Consumer Spending

Retail sales remain "poor," according to many contacts.

Declines in interest rates have not stimulated purchases of traditionally

interest-sensitive goods, such as automobiles. One contact noted that,

despite rising personal income and employment in Arkansas, household

spending continues to decline. Many District retailers are trying to

jumpstart sales by beginning holiday advertising and sales earlier than

usual, without additional workers.

Housing and Finance

Housing starts have not picked up appreciably in recent months

and no significant rebound is expected until 1992. New home sales,

especially to first-time homebuyers, have improved slightly because of

declines in interest rates. Contacts stress that many prospective buyers

have remained out of the housing market because of concerns about their

VIII-3

future employment and expectations of still-lower interest rates in the

months ahead. One St. Louis mortgage banker noted that, although

mortgage demand has picked up slightly, one-half of all closed real

estate loans still are refinancings. Total loans outstanding at a sample

of 93 District banks increased more during the last two months than they

had the previous two months, with all categories but real estate showing

improvement.

Transportation

Barge movements and rates charged for shipments on the

Mississippi river in the St. Louis area have increased lately. Seasonal

harvest activities and increased exports have provided the impetus.

Barge traffic in Paducah has kept pace with last year's record level,

while transportation of nonagricultural raw materials has boosted barge

activity in Little Rock. Air cargo shipments have fallen below

year-earlier levels in Louisville and St. Louis, but they are up

significantly in Memphis.

Agriculture and Natural Resources

The fall harvest is nearing completion for most crops. Corn and

soybean yields, hurt by lack of moisture during critical periods this

summer, are expected to be lower in most District states. Although a

record rice crop is predicted in Arkansas, contacts report that disease

and cold weather may have damaged yields. Insects are reported to be

affecting parts of the cotton crops in Arkansas, Mississippi and

Tennessee, but a good crop is expected nonetheless. Year-to-date coal

production is down from last year's levels in Illinois and western

Kentucky, but is up slightly in Indiana. Southern pine lumber mills

report that orders, production and shipments all are up compared with a

year ago.

IX- 1

NINTH DISTRICT-MINNEAPOLIS

Conditions in the Ninth District generally were mixed, but have deteriorated recently in the

labor market, where unemployment rates were uniformly higher. Retail sales were fairly strong, but

car sales remained weak, while homes sales turned down. Crop yields were mixed, and prices on

most agricultural products were sharply lower than a year ago. Tourism remains a major bright

spot.

Employment, Wages, and Prices

Reversing their generally positive trend, labor market conditions deteriorated somewhat in

the District. In Minnesota the August unemployment rate was 4.8 percent, up from 4.6 percent a

year ago, and 0.4 percent higher than the previous month. This weakness in the Minnesota labor

market was also reflected in nonagricultural employment growth which was up only .56 percent in

August relative to a year ago, with substantial declines being registered in manufacturing (down 1.52

percent), and construction (down 4.70 percent). In a possible signal that this trend will continue,

initial unemployment claims in Minnesota were also up 13.7 percent in August relative to their year

ago level. In Montana, the August unemployment rate was 5.8 percent, up from 4.6 percent a year

ago (but down slightly from its July level of 6.1 percent), while the August nonagricultural

employment was 1.03 percent higher than a year ago. In North Dakota, the August unemployment

rate was at 4.3 percent, up from 3.4 percent a year ago, while in South Dakota it was 3.7 percent,

up from 3.3 percent. In both cases, the August level was somewhat higher than the July level (3.9

and 3.2 respectively for North and South Dakota). South Dakota's nonagricultural employment was

a robust 2.99 percent higher in August than its year ago level, while in North Dakota it grew by a

respectable 1.43 percent over the same period. The strong employment growth in South Dakota over

this period was led by manufacturing (up 3.43 percent), construction (up 5.80 percent), and trade

IX - 2

(up 4.07 percent). In the Upper Peninsula of Michigan the August unemployment rate was 8.6

percent, up from 8.0 a year ago, but down 0.1 percent from its July level. Unemployment rates in

western Wisconsin, which are only available through July, were also higher than their year-ago

levels.

Consumer Spending

Retail sales have been fairly strong in the District, with major retailers reporting sales

increases in comparable stores for the five week period ending October 5 of 5 to 10 percent. Gross

sales tax receipts in Minnesota were up 8.4 percent in August relative to a year ago, but

approiximately 0.6 percent of this increase reflects a rise in the state's sales tax. Retail sales have

been strong in Montana, North and South Dakota, and the Upper Peninsula of Michigan, which

continue to reap the benefits of the influx of Canadian shoppers.

District new car sales continue to be weak with domestic auto companies reporting sales

declines ranging from 9 to 20 percent in September relative to a year ago, and year-to-date sales

declines are reported to be even larger. However, truck sales have surged recently with September

sales increases reports ranging from 15 to 46 percent higher than a year ago, though year-to-date

sales are still well below last year's levels.

Housing sales remain mixed in the District. In the Minneapolis-St. Paul area, housing sales

dropped 13.4 percent in September relative to a year ago, after rising in August. The September

median single-family home price was up only 3.2 percent from a year ago. This continues the trend

of the 1980's in which home prices in Minnesota have failed to keep pace with inflation. In contrast,

housing sales were reported to be improving in North Dakota and Montana.

Tourism activity has been excellent in all parts of the District. The number of crossings over

the Mackinaw Bridge onto the Upper Peninsula of Michigan was 4.2 percent higher for the first nine

IX - 3

months of this year. The American League Championship and potential World Series are expected

to bring $6 million dollars in direct spending per local game to the Minneapolis-St. Paul area.

Construction and Manufacturing

Conditions in the District's construction industry have been mixed, with the overhang of

office space in the Minneapolis-St. Paul area expected to continue to depress commercial activity.

In addition, August housing permits in Minnesota were down 8.0 percent relative to a year ago, and

31.2 percent relative to two years ago. Elsewhere, construction is reported to be particularly strong

in South Dakota, and to be doing well in Montana and North Dakota.

Conditions were mixed in the District's manufacturing industries, with a number of firms

reporting layoffs. However, in Minnesota's manufacturing sector, the August level of average

weekly hours (at 40.8) was about the same as a year ago, though higher than in July (40.1), while

the level of average weekly earnings was up 3.2 percent in August from a year ago. New business

incorporations in the state were also up 7.0 percent in July relative to a year ago.

Resource-Related Industries

Crop yields in the District, with the exception of Minnesota, were generally good. Excessive

precipitation in Minnesota has hurt key crops (corn and wheat production are expected to be lower

than last year), but apples in particular have benefitted. In addition, the high moisture level

combined with a mild winter threatens the state's corn crop with extensive insect damage. In North

Dakota, crop production estimates for corn and dry beans are sharply higher than year-ago levels

(up more than 40 percent), but food and feed grain production is expected to decline by 9 percent.

In Montana the wheat crop forecast for 1991 is the highest production level since 1982. Agricultural

prices are down sharply. The September level of the Minnesota index of prices received was 7.8

percent below a year ago; crop prices were down 4.3 percent, livestock prices were down 13.7

IX -4

percent, dairy products prices were down 4.6 percent, and poultry products prices were down 6.3

percent. Potato farmers in North Dakota are reported to be particularly hard hit by the price

declines.

Mining has been mixed in the District. Despite substantial price declines, year-to-date

income from copper, silver, and molybdenum mining was up substantially in Montana from last year.

The lumber and wood products market is mixed, with problems due to environmental issues

anticipated in the near future.

X-1

TENTH DISTRICT - KANSAS CITY

Overview. Economic conditions in most of the Tenth District continue to

show only modest improvement. Retail sales and new home sales are up

somewhat. But new car sales are off slightly and housing starts are sluggish.

Drilling for oil and gas continues to slip and falling cattle prices have

slowed the growth of farm income. Both retailers and manufacturers want to

trim inventories and retail and wholesale prices are generally steady to

somewhat lower.

Retail sales. Retail sales have increased somewhat across district

states over the past month. Clothing sales are strong, but sales of big

ticket items are weak. Some retailers expect relatively strong sales when the

holiday season arrives. Prices have been steady to somewhat lower over the

past month and are expected to remain steady. Strong competition for the

consumer's dollar appears to be keeping downward pressure on prices. Most

respondents consider their inventory levels too high, but some expect to

expand inventories more than seasonally as they stock up on spring goods.

Auto sales are down slightly from a month ago in most district states.

Some potential buyers continue to have difficulty getting loans. Dealers are

trimming their inventories of 1991 cars and expanding their new model

inventory. Respondents expect auto sales to remain flat or improve slightly

through the remainder of the year.

Manufacturing. Purchasing agents report few increases in input prices

over the past month, and expect little further change in prices this year.

Materials are readily available. Most firms are trying to trim inventories,

and expect to do so through year-end. A few plants are working close to full

capacity, but none report bottlenecks or skilled labor shortages.

Energy. Activity in the district's oil patch continues to slow in

response to weak prices for natural gas and crude oil. The average number of

operating rigs in district states fell from 235 in August to 232 in September.

This dip caused the district rig count to fall about 24 percent below its

year-earlier level.

X-2

Housing Activity and Finance. While housing starts over most of the

district were down from last month, starts are above year-ago levels and are

expected to end 1991 ahead of last year. New home sales are up, helping to

reduce the inventory of unsold homes. Prices for new homes are also up

moderately. Builders report no problems acquiring materials, but lumber

prices remain high.

Most savings and loan respondents report net deposit outflows last

month. Deposits are expected to remain flat or decrease in coming months.

Mortgage demand varies widely across the district. Most respondents expect

mortgage rates to soften slightly during the next several months.

Banking. Changes in loan demand were mixed at district commercial banks

again last month. Half the respondents report no change in overall loan

demand. The other half was split equally in reporting increases and decreases

in overall loan demand. Demand was lower for commercial and industrial loans

and most real estate loans, but higher for agricultural loans. Demand for

home mortgage and home equity loans was constant to slightly higher. Loan-

deposit ratios showed no definite trend last month. Changes in total deposits

were also mixed. NOW accounts, MMDAs, and IRAs and Keoghs increased at some

banks, however.

Most respondents report decreases in their prime and consumer lending

rates. Several of the respondents expect to lower these rates further in the

near term. No banks report changes in other lending terms.

Agriculture. The fall harvest is underway in most of the district.

Corn, soybean, and milo yields vary widely. Dry weather cut dryland yields by

more than half in some areas, but irrigated crop yields are expected to be

better than average.

Unfavorable weather continues to plague district farmers and ranchers.

Wet weather has delayed the cotton harvest in Oklahoma. But dry weather has

slowed planting of the winter wheat crop in much of the district. Dry weather

has also scorched district pastures, causing ranchers to feed previously

harvested forages to their cattle. Forage supplies are generally adequate,

however, because the spring hay crop was large in most areas.

District cattle ranchers and feeders continue to adjust to last summer's

sharp drop in cattle prices. Prospects of further declines in feeder cattle

prices have encouraged many ranchers to sell their calves instead of feeding

them to heavier weights or retaining them for breeding herds. Meanwhile,

operating losses have led feedlot operators to reduce the number of cattle on

feed. These adjustments should trim the backlog of unusually heavy cattle

that pushed cattle prices down, enabling gradual recovery in prices during the

rest of the year. Still, cattle prices are likely to remain below the record

levels of recent years, eroding the main source of strength in district farm

incomes.

ELEVENTH DISTRICT--DALLAS

The District economy is growing very slowly and rates of expansion are

uneven across the District. Many firms note that they are selling less than

they expected and that they are unusually uncertain about the future. Service

sector expansion is weak. Retail sales are below respondents' expectations

and show only slight nominal growth from a year earlier. Auto sales remain

anemic. Manufacturing output is expanding slowly. Although construction

contract values are increasing, they remain at low levels. The oil and gas

industry is in the doldrums as a result of low natural gas prices.

Agricultural producers expect good yields. Some businesses report

difficulties obtaining credit. Commercial banks say funds are available to

lend, although credit standards have tightened from earlier this year.

Activity is strongest along the Mexico border where a strong peso is

encouraging U.S. purchases. Growth in Houston has slowed but remains positive

while activity in the Northern portion of the District may be contracting

slightly.

The service sector is growing very slowly and respondents say that

competition is intense. Temporary firms report an increase in demand for

manufacturing-related employment but not for service-related temporaries.

Accounting firms also note an increase in demand from manufacturing companies,

although overall demand is flat. Activity in the advertising sector has

increased slightly, but firms report a shift to cheaper direct-mail

advertising. Demand for legal services is unchanged from a year earlier,

although international demand is showing strength. Airlines report that heavy

competition continues to hold down prices.

XI-2

Retail sales growth remained weak in September. Sales were below

expectations and several retailers have reduced their forecasts for the rest

of the year. Several department store respondents note that weakness is

widespread across their industry. Inventories have been reduced and prices

remain very competitive. Children's merchandise has been selling well but

sales of ladies and mens apparel remains weak. Sales growth continues to be

strong along the Mexican border, but the rate of expansion has slowed.

District auto sales are mixed. September unit sales increased in

Houston, but year-to-date sales are still below last year. Dallas area auto

sales continue to decline and are about 8 percent below last year's level.

Manufacturing output is growing slowly. Sales of electric and

electrical machinery are up a little and producers report increased demand for

memory components, microprocessors and programmable logic drivers. District

apparel producers cite continued sales increases. Demand for lumber, wood and

paper products has fallen recently. Glass sales have changed little in the

last few months, but the demand for brick has increased. Chemical production

has increased to rates of a year ago, but firms say that competition is high

and that input costs are rising. Demand for primary metals continues to

decrease and is now well below this time last year. While fabricated metals

sales have moved up lately, the expansion is said to be seasonal; orders are

still well below last year. Petroleum refining is unchanged. Low natural gas

prices and expectations of reduced drilling are said to have pushed down

orders of oil field machinery. For some larger producers, increases in

international sales have partially offset domestic declines.

XI-3

District construction contract values are increasing very slowly, and

remain at low levels. Although residential construction values have picked up

across the District, demand is below last year's level in Houston and in the

Dallas/Ft. Worth area. Public construction continues to increase. Demand for

commercial and industrial construction has been flat and remains at very low

levels.

Oil prices have held steady around $21-$22 per barrel for the past eight

months. Natural gas prices, however, plummeted to twelve-year lows in July,

leaving the oil and gas industry in the doldrums. Although natural gas prices

have increased slightly since July, drilling activity in the region has

declined, with many oil companies concentrating their exploration and

production activities abroad. District energy firms are announcing layoffs.

Respondents expect the fourth quarter to show seasonal increases in oil and

gas prices. In the long run, respondents are optimistic about natural gas

prices, because of expected increases in demand as a result of the Clean Air

Act and of increased exports to Mexico.

Although agricultural yields are expected to be good, recent wet weather

has damaged some crops. Producers report higher prices for most crops and

lower prices for most livestock commodities. Strong demand is helping to keep

cotton prices relatively high and record volumes of cotton are expected to be

harvested.

District commercial banks report that funds are available for lending.

Loan demand, however, is reported to be weak. Some banks indicate that they

have tightened their credit standards over the past year.

XII- 1

TWELFTH DISTRICT -- SAN FRANCISCO

Summary

Economic weakness continues in much of the Twelfth District, though intermountain areas

remain relatively strong. Retail sales are sluggish, with some contacts reporting declining

consumer confidence. Manufacturing activity is mixed, with conditions in California and the

Pacific Northwest deteriorating, while conditions in Idaho and Utah remain stable. The slump in

commercial real estate continues, particularly in southern California. Residential sales activity has

declined following the rebound in the first half of 1991, but median house prices remain stable.

Wage and price increases, with the exception of health care, are modest throughout the District.

Outside of refinancing activity, loan demand remains sluggish. Agricultural conditions are mixed.

Business Sentiment

Economic expectations of Twelfth District business leaders worsened in October. Eighty-

five percent of respondents (versus 70 percent in September) now foresee national GNP growth

of less than 2.5 percent during the next four quarters. The percentage of business leaders

expecting the next four quarters to be characterized by recession increased to 17 percent (versus 7

percent in September), ending a trend of improved recession expectations that began in January.

The outlook of business leaders in the West worsened in October for business investment,

consumer spending, and the trade balance. The most optimistic expectations of business leaders

were in the areas of housing starts and inflation, where about half of the respondents projected

some improvement in the next four quarters.

Wages and Prices

Upward pressures on wages and prices remain minimal throughout most of the Twelfth

District. Retail prices continue to be constrained by sluggish consumer demand. Prices have

XII - 2

fallen for fresh meats and vegetables, and remain stable for dry goods. Group health care

coverage costs are expected to increase 20 to 30 percent, with HMO's projecting increases of 10

to 15 percent. Wage increases in the Twelfth District mostly are reported in the 3 to 4 percent

range, although in some areas and industries in the Pacific Northwest, wages are reported to be

rising 4 to 5 percent.

Retail Trade and Services

Consumer spending remains weak in the Twelfth District. Most reports suggest that

consumers are hesitant to make large purchases in the face of increased economic uncertainty.

Retail soft goods sales remain sluggish, although one retailer notes a recent pick-up in men's

clothing sales which the retailer views as a leading indicator of overall sales. In Seattle, the

bankruptcies of two large retailers are being blamed partially on sluggish sales. Auto sales also

are reported slow, with one dealer indicating that consumers are expecting prices to fall. Business

at law firms is reported flat to down 15 percent with some layoffs expected. State and local

government budgets remain tight, especially in California and the Pacific Northwest.

Manufacturine

Manufacturing activity in the Twelfth District remains mixed. Conditions in California and

in some industries in the Pacific Northwest continue to deteriorate. The aerospace industry in

California continues to report layoffs, although the number of job losses is smaller than in the last

two years. Boeing still is producing at full capacity, but orders so far in 1991 are well below last

year's pace. Low aluminum prices and demand will likely lead to production cutbacks. In Idaho

and Utah, however, manufacturing activity is reported stable. In Idaho, solid conditions are

reported for food processors and electronics firms.

Agriculture and Resource-Related Industries

Agricultural conditions in the Twelfth District are varied, with prices for some crops still

XII - 3

low. Farmers in California's Central Valley report declines in fresh fruit and vegetable prices

because of high production. In Idaho, dry bean prices are down 50 percent from last year, and

potato prices have fallen over 40 percent since Spring. Livestock conditions remain split with

producers still profitable, while feedlot operators continue to lose money. Dairy farmers are still

facing tough conditions as a result of low prices.

The lumber industry continues to face falling finished product prices, while timber prices

remain very high. Lumber product prices are expected to continue to erode into early 1992.

Electric power prices in the Pacific Northwest have increased recently because of low runoff and

the shutdown of two nuclear power plants in the region.

Construction and Real Estate

Construction and real estate activity remains slow in much of the Twelfth District, though

some strength is reported in Arizona, Idaho, and Utah. New construction is reported to be

constrained by lack of credit and the effects of Resolution Trust Corporation sales. Residential

home sales, which had rebounded in the first half of the year, now are reported to be sluggish

throughout California and the Pacific Northwest, though median prices remain stable.

Commercial real estate markets continue to face sizable oversupply, particularly in southern

California. In Los Angeles, office rents have plummeted and the downtown vacancy rate

reportedly may reach 30 percent in 1992.

Financial Institutions

Twelfth District financial institutions continue to report mixed conditions. In California

and the Pacific Northwest, loan demand remains sluggish outside of refinancings, especially for

consumer loans. Non-performing loans continue to rise in California, but some institutions report

increased selling or liquidation of these assets. Layoffs are reported among Arizona and

California banks. Banking conditions remain solid in Idaho and Utah.